If you’re looking for a safe, convenient place to keep your cash, a bank account is a must-have — more specifically, a checking account. Checking accounts are considered deposit accounts, allowing you to quickly and easily deposit or withdraw money. But do checking accounts earn interest? Since this type of account is used mostly for day-to-day transactions, checking accounts generally don’t earn you interest on your deposits. However, that isn’t always the case. Read on to learn the basics of checking accounts and interest.

Checking account basics

A checking account is used for today, whereas a savings account is used for tomorrow. In other words, your checking account is primarily for day-to-day transactions around money coming in (such as checks, Venmo transfers, Zelle, direct deposit), and out (such as bill pay, rent checks, and spending money via day-to-day purchases made using your debit card).

A savings account is a place to hold some of your money specifically for the purpose of saving. This could be for an emergency fund, rainy day fund, or vacation.

Checking accounts don’t always earn interest, but some do. Savings accounts, on the other hand, do earn interest, which can help you build your savings.

Opening a checking account can help you streamline your personal finances, but there are potential fees that you should be aware of:

• Monthly maintenance fee: Your bank may charge you to maintain the account or if your checking account balance dips below the minimum balance requirements.

• ATM fee: You can make cash withdrawals from an ATM using your debit card. You may be charged an ATM fee if it’s not in your bank’s network.

• Overdraft fee: If there isn’t enough money in your account to process a transaction, you may get hit with an overdraft fee, which can cost an average of $35.

When opening a checking account, look into the fee schedule to understand all fees associated with the account.

Interest-earning checking accounts

Though checking accounts aren’t always known for earning interest, some interest-earning checking accounts are on the market. That means you can earn interest on the money you keep in your checking account for bills and transactions. This interest is typically paid out each month.

Your earnings will be based on the annual percentage yield (APY) associated with the account — what you might earn in a year. A higher APY will score you higher interest earnings.

Unfortunately, high-yield checking accounts are rare — most checking accounts have a low APY. Based on the most recent data from the Federal Deposit Insurance Corporation (FDIC) — the US government entity that insures your deposits up to $250,000 — interest-earning checking accounts have an average APY of 0.07%.

Interest-earning checking accounts may come from an online bank that doesn’t have physical branches or a traditional bank. There may be higher minimum balance requirements or fees in exchange for earning interest.

Factors that affect interest rates

One thing to note is that interest-earning checking accounts typically have a variable APY. That means the rate can shift based on a number of factors.

One of those factors is the economy and the Federal Reserve’s interest rates. If those rates go up, it’s likely your APY will, too; conversely, if rates go down, so will your checking account's APY.

Additionally, some banks may have different APYs based on your account balance. Higher balances likely mean higher APYs. To find the best APY, shop around and look for the best checking account interest rates. Spending a little time on research could mean earning more on your deposits.

Pros and cons of interest-earning checking accounts

If you’re considering getting an interest-earning checking account, review the pros and cons before opening an account.

Pros:

• Earn interest on your account balance. With an interest-earning checking account, it’s possible to watch your account balance grow without doing anything extra.

• Funds are insured up to $250,000. If you’re worried about putting your money in a checking account, you can rest assured that your deposits are insured up to $250,000 through the FDIC (or the National Credit Union Administration if you bank with a credit union). So, if your bank fails, your deposits will be reimbursed up to the $250,000 mark.

• Flexible and accessible. Checking accounts usually come with convenient mobile banking capabilities allowing you to easily transfer money between accounts or to someone else, spend with a debit card, write a check, cash a check, pay your bills, or grab some cash at the ATM.

Cons:

• May have a minimum account balance or other eligibility requirements. One of the downsides to consider is that you may need to have a certain account balance to qualify for an interest-earning checking account. You may also have to meet other eligibility requirements, such as having a minimum number of monthly debit card transactions.

• Low variable APY. The annual percentage yield you get on your interest-earning checking account is likely relatively low compared to other financial products. Plus, the rate is variable and may change.

• May have monthly fees associated with it. Some interest-earning checking accounts have a monthly fee, which can cut into your interest earnings. If the interest you earn is less than the fee, it may not be worth it.

How to open an interest-earning checking account

To open an interest-earning checking account:

• Do your research. Look for member FDIC or member NCUA interest-earning checking accounts from various banks, financial institutions, and credit unions. Check the APY, what monthly service fees are associated with the account, account minimums, and other eligibility requirements. See if there are any checking account promotions for new account holders, such as cash back perks or overdraft protection.

• Choose an interest-earning checking account. After reviewing all the options, narrow it down to one account that you want to open. Look at the required documentation and any minimum deposits.

• Get your documents. To open a bank account, you’ll need to provide personal information such as your name, address, date of birth, and other documentation. Gather your Social Security number (SSN), driver’s license, and funds for an initial deposit. You may also need a bill proving your current residence and birth certificate.

• Open an interest-earning checking account. You may be able to do this online or via your local branch with all of your information and documents handy.

• Review the fine print. Look at all the terms and conditions associated with the account to avoid surprises or unnecessary fees.

Once your interest-earning checking account is open, you can start to manage your money and make transactions using your account, all while earning a little extra money.

Are interest-earning checking accounts worth it?

Having the type of checking account that earns you interest may sound like a good idea, but consider all the perks and downsides, including account requirements. Bottom line: because interest-earning checking accounts aren’t common, placing your money in a savings account makes more sense if you want to earn more via higher interest rates and compound interest.

Based on the most recent FDIC data (July 2023), the national deposit rate for a savings account is 0.42%, six times more than the 0.07% interest-bearing checking accounts earn. However, you can earn even more with a high-yield savings account, a money market account, or a certificate of deposit (CD). These options not only help you earn more but also help you save money.

Money market account national deposit rates stand at 0.61%, and a 12-month CD's APY is 1.63%. You could earn much more with other accounts than. Be aware that you commit to a term with a CD and can’t touch your money before it reaches its maturity date without consequences such as penalties and fees.